Pricing Innovation in Retail Banking the Case for Value-Based Pricing

Pricing innovation in retail banking The case for value-based pricing

Research from the Deloitte Center for Financial Services Pricing innovation in retail banking

About the Center for Financial Services

The Deloitte Center for Financial Services (DCFS), part of the firm’s US Financial Services practice, is a source of up-to-the-minute insights on the most important issues facing senior-level decision makers within banks, capital markets firms, mutual fund companies, investment management firms, insurance carriers, and real estate organizations.

We offer an integrated view of financial services issues, delivered through a mix of research, industry events, and roundtables, and provocative thought leadership—all tailored to specific organizational roles and functions. The case for value-based pricing

CONTENTS

Introduction | 2

Price check! | 5

Credit card resurgence | 10

A new mortgage paradigm | 15

The need for customer value-based pricing innovation in retail banking | 19

Appendix A: Methodology | 20

Appendix B: Product attributes and levels | 21

Endnotes | 24 Pricing innovation in retail banking

Introduction

“Price is what you pay. Value is what you get.”1 — Warren Buffet

With all the talk of disruption and innovation in re- liquidity standards (for example, Basel III), banks tail banking today, one topic does not get the atten- have generally reacted by modifying their pricing tion it deserves: strategic pricing. Bankers rarely tactics to focus more on costs and risks (see figure 1). discuss pricing innovation as a tool for competitive Meanwhile, other industries such as airlines, ride differentiation and raising profitability. This report sharing services, hotels, and digital media continue will argue why they should, and how. to experiment with innovative pricing strategies, In the past decade, pricing in banking has captured and their customers seem to have accepted the new attention for all the wrong reasons, inviting intense pricing schemes with little resistance. regulatory and public scrutiny. Faced with new reg- Effective pricing “cannot be reactive and simplis- ulations on product structures (for example, quali- tic.”3 We believe it is high time that retail banks in fied mortgages), fee income (for example, the CARD the United States innovate pricing to reflect the way Act2 or the Durbin Amendment), and capital and that consumers actually perceive and receive value.

Of course, the notion of value-based pricing in retail banking is not new, at least in the credit card business.4 A few banks made strategic pricing a core discipline, and have become dominant players in the industry.

In this report, we suggest how banks may consider adopting and refining value-based pricing strategies for three products—checking accounts, credit cards, and mortgages. First, we quantify the potential impact of different product and price attributes on consumer choice. We then identify gaps in the communication of value regarding these attributes, and highlight differences in choice behavior across demographic and credit segments. These insights are based on choice experiments and a survey among

2 The case for value-based pricing

INTERPRETING THE RESULTS OF THE DISCRETE CHOICE ANALYSIS In our study, each respondent participated in choice experiments for two of three products—checking accounts, credit cards, and mortgages. They were presented and asked to choose between three randomized product configurations (and a “none” option). Respondents repeated this task four times for each product.

We analyzed the data from this exercise using discrete choice modeling, a method of conjoint analysis, to infer the trade-offs consumers make between different attributes (and specific levels within each attribute). We also estimated shifts in consumers’ likelihood of choosing an offering with changes in product configuration.

To illustrate the key insights from this analysis, we first present the overall choice probability for a “test” product, one roughly replicating a standard market offering. We then show shifts in this choice probability as the levels of each product attribute are changed, and focus our discussion on the key attributes that contribute the most variation in choice probability. Finally, we offer some recommendations for new pricing approaches.

A detailed description of the modeling methodology, along with a full list of product attributes and attribute levels, are shown in the appendix.

3,001 bank consumers (see sidebar, “Interpreting der differences, and the general ineffectiveness of the results of the discrete choice analysis”). fee waivers.

Our research reveals that price attributes domi- In the following sections, we present the results of nate consumer choice, and the trade-offs consum- our choice experiments and compare these find- ers make among price and non-price attributes are ings with consumers’ stated preferences for choos- somewhat counterintuitive. Value perceptions vary ing checking accounts, credit cards, and residential starkly across products and affect choices different- mortgages. We also run simulations to assess con- ly across demographic segments and credit profiles, sumers’ sensitivity to certain key product attributes, but we also observed consistencies in behavior. We and then offer suggestions for ways that banks were surprised by some results, such as the strong should rethink their pricing strategies based on cus- correlation between price sensitivity and age, gen- tomers’ choice trade-offs and value perceptions.

3 Pricing innovation in retail banking

Figure 1. Current state of pricing in retail banking Checking accounts Credit cards Mortgages

• Fees • Fees • Interest rates • Interest rate • Interest rate • Origination fees • Fee waivers • Fee waivers • Cross-product special offers Traditional • Introductory offers • Introductory offers and • Other service fees rewards pricing levers

• Attract and retain active • Maximize revenues through • Maximize risk-adjusted accounts consumers’ spend volumes interest margins • Cover costs of inactive or and wallet share • Earn up-front income dormant accounts • Maximize risk-adjusted through origination fees • Create a platform for cross- interest margins • Cross-sell products Pricing selling and up-selling • Drive revenues through to increase customer objectives annual fees, partnerships, profitability and co-branding

• Cost-plus (e.g., fees • Risk-based • Risk-based covering costs of servicing • Value-based (e.g., co- • Cost-plus (to cover funding active and inactive branded offerings, rewards) and capital costs) accounts) • Bundling of basic services • Bundling (e.g., “all-in- • Bundling of basic services (e.g., insurance, rewards) one” special offers linked • Unbundling of value-added/ • Co-branded offers or to other products, rate ancillary services (e.g., discounts discounts) Pricing certified checks, non-bank strategies ATM use) • Usage-based (different price tiers based on usage; e.g., wire transfers)

• Fixed costs of servicing, • Cost of capital allocated to • Cost of capital allocated to branch operations, and manage default risk manage default risk and maintaining distribution • Costs of funding interest rate risk channels • Fixed costs of distribution • Costs of funding (with • Variable costs of value- and payments processing additional liquidity costs for added services operations non-conforming mortgages) Key input • Fixed costs of regulatory • Fixed costs of distribution costs and tax compliance network, servicing, and • Cost to carry excess balance regulatory compliance sheet liquidity in slow-loan growth environment

• Low level of differentiation, • Relatively high level of • Low level of differentiation except for online-only differentiation • Largely plain-vanilla offerings • Wide variety of product offerings that primarily • Largely undifferentiated offerings differ on price offerings • Core set of points-based • Product structure and cashback offerings constrained by regulation Extent of • Some niche/tailored offerings from most major banks and and acceptance in differentiation • Online-only offers compete credit card issuers secondary market among on price by offering free • Innumerable, differentiated • Borrower options offerings accounts and paying and co-branded offerings expanding gradually interest targeted at micro-segments following post-crisis clampdown

• Rate structure (fixed vs. • Monthly fees • Annual fee variable) • Type of bank • Interest rate • Interest rate • Monthly fee waivers • Primary rewards Top drivers • Loan term • Branch proximity of consumer • Introductory offer • Origination fees choice

4 The case for value-based pricing

Price check!

HECKING accounts are the most essential financial tool in modern American society. In Checking accounts are C2013, 92 percent of US households, roughly 115 million, had access to a checking or savings fundamental anchors of account.5 Demand deposits, a reasonable proxy for customer relationships. checking account deposits, totaled more than $1.5 trillion at the end of March 2016.6 While this sum represents only about 14 percent of US domestic deposits,7 checking accounts are fundamental Consumers’ survey responses also underscored the anchors of customer relationships in several ways. sensitivity to fees (see figure 4). More than seven in They help banks access funds at low cost and ten stated that “no monthly fees” are a “must have” support cross-selling. Checking account customers when choosing a checking account. The aversion are also quite loyal: Our survey showed that more to fees was particularly pronounced among older than one-half of all respondents had their primary respondents and women, trends we witnessed across checking account with their current bank for more credit cards and mortgages as well. Also, consumers than 10 years. with high credit scores showed a greater preference for no fees.11 And, not surprisingly, consumers Pricing of checking accounts has a checkered insisting on “no minimum deposit required” and history in the United States. Overdraft fees, in “no monthly fees” overlapped significantly. particular, have been subject to intense scrutiny in recent years.8 When banks attempted to raise monthly fees in the past, consumer backlash forced Figure 2. Test checking account some banks to backtrack on fee increases.9 However, checking account fees have peaked recently, as “free” Choice probability: 53.5% accounts have become rarer than ever.10 Large national bank with branches across the US

Consumers are obsessed with $10 monthly fee, waived with monthly fees... $1,000 in monthly direct deposits

When presented with a test checking account that is No interest earned quite common in the market today (figure 2), 53.5 Branch within 5 minutes of percent of study respondents chose this product. home or work Foremost, our modeling simulations show that monthly fees are by far the most significant driver Introductory oﬀer with a $150 cash bonus of consumer choice for checking accounts (figure 3), for a $500 minimum initial deposit with consumer preference dropping dramatically Standard overdraft coverage, with $35 fees for as fees increase. For instance, raising the fee on each use our test checking account from $10 to $25 caused choice probability to drop by 26 percent; dropping it No other special oﬀer to “zero” (that is, “free”) increased customer choice Graphic: Deloitte University Press | DUPress.com likelihood by 36 percent.

5 Pricing innovation in retail banking

Figure 3. Checking accounts: The most important attributes that inﬂuence consumer choice Change in choice probability due to variations in attribute levels

Monthly fees 63%

Type of bank 35%

Monthly fee waiver 14%

Branch proximity 13%

Interest rate 12%

Type of new account offer 10% Requirements of new account offer 7% Special offers 4%

ATM network and fees 4% Overdraft protection and coverage 3% Amount of new 1% account oﬀer

Source: Deloitte Center for Financial Services. Graphic: Deloitte University Press | DUPress.com

…Even though most satisfy were decidedly more popular. Changing the test product’s waiver requirement of “$1,000 in consumers don’t pay monthly direct deposits” to “$20,000 in deposits at these fees! the bank” reduced choice probability by 14 percent.

Consumer focus on fees is puzzling because nearly 80 percent of our respondents hadn’t paid monthly Bank size and brands matter fees in the last year, consistent with other research Among non-price attributes, bank size had the most on this topic.12 Banks generally make it easy to avoid influence on choice in our test checking account. paying fees, with minimum cash-flow or deposit Survey respondents did not think a bank “with a requirements. recognizable brand” and “many branches” was that Equally perplexing is that Millennials are least important. But when we changed the bank type in averse to paying fees, despite the fact nearly four in our test product from a large national bank to a ten of them did pay fees in the last year. We believe small community bank, choice probability declined older age groups’ price sensitivity is due to the fact by 8 percent. These results mirror what’s happening that they were accustomed to free checking accounts in the industry today: As large banks step up their for a long time.13 Our survey findings support this digital offerings, customer satisfaction is indeed theory—respondents who paid fees in the past were improving,14 and the 10 largest banks by deposits more tolerant of fees. Of those who paid monthly in the United States control over half the deposit fees in the last one year, only 40 percent insist on market.15 no fees, compared to nearly 80 percent of those who The preference for bigger banks held for midsize didn’t. banks and community banks as well—respondents As for fee waivers, which are ubiquitous in the preferred the larger institutions here as well. industry, our study shows that they materially Importantly, we found that consumers are not so impact choice, although not nearly as much as much into online-only banks, yet; changing the bank monthly fees. Requirements that are “easier” to type to online-only drove choice probability down

6 The case for value-based pricing

Figure 4. How important is each of the features below when choosing a bank for your checking account? No monthly fees 71% 27% 2%

Online banking 66% 23% 10% 1% Branch close to where I live or work 47% 45% 8%

No minimum 41% 46% 12% deposit 1%

Mobile banking 38% 30% 30% 1%

Low minimum 34% 44% 20% 2% deposit Low ATM fees for out-of-network 33% 42% 23% 2% transactions

Many ATMs 32% 48% 20% 1%

Interest on monthly balance 30% 57% 12% 2%

Bank with a 28% 47% 24% 1% recognizable brand

Many branches 26% 56% 18% 1%

Must have Nice to have Not needed Don’t know

Source: Deloitte Center for Financial Services. Graphic: Deloitte University Press | DUPress.com by a remarkable 35 percent. These data suggest that Across generations and income categories, con- small, and especially online-only institutions, need sumers wanted “a branch close to where I live or to differentiate on price competitiveness through work.” As expected, only those who currently had an lower fees or paying interest on balances and value- account with an online-only bank were indifferent added services, such as eliminating out-of-network to branch location. ATM fees, to attract customers. Not interested in Branch location remains interest (for now) fundamental, even One of the more surprising findings from the for Millennials choice experiment is that interest rates on checking accounts were not a major determinant of choice. For decades, branch location had been the most Most checking accounts today offer close to zero important reason Americans chose their primary percent interest. But when we tested if a rate of bank.16 Interestingly, this remains true even today 0.5 percent would meaningfully impact preference, when digital banking is expanding rapidly.17 In it did not—choice likelihood rose only 12 percent. our simulation, as we increased the distance to the In our survey, less than one-third of respondents branch from “5 minutes away” to “15 minutes away,” rated earning interest as a “must have.” This lack choice probability declined by 7 percent; if the of enthusiasm for interest income could prove location was “more than 30 minutes away,” choice temporary—as rates finally do rise, sensitivity to likelihood dropped 13 percent. interest income may also increase.

7 Pricing innovation in retail banking

If you want me, show fact that most consumers do not pay any fees. This behavior is consistent with research in behavioral me I’m worth it economics showing that when consumers feel they are “getting something for nothing,” a material The only other attribute of note in consumer choice spike in demand follows.18 was the new account offer—choice likelihood declined 10 percent when there was no initial joining Another striking result from the checking choice offer. Consumers have come to expect incentives for simulation is that fee sensitivity increases with age. changing banks, given that switching costs are high. The differences in choice probabilities across age Our survey revealed that even younger checking groups are notable even at $0 (zero price). account holders remained with the same bank for many years. As for the effect of interest rates, we notice that consumer demand is linear, with no sharp increase in choice as interest rates rise. Age differences are Sensitivity analysis also evident in this simulation (figure 6).

As additional analysis, we ran choice simulations to test for sensitivity to checking account fees and What should banks do about interest rates. pricing checking accounts? The price threshold for monthly fees at $0 is Checking accounts serve retail banks in three significant, well beyond the threshold for any of the important ways: They are a crucial funding source; other products. First, we observe that the “zero-price” they anchor customer relationships; and they yield effect is very prominent. An increase in monthly fees from various service charges, such as overdraft fees from $0 to $1 led to steep drops in choice fees. With these facts in mind, the following checking probability for all age groups (figure 5), despite the account pricing strategies should be considered:

Figure 5. Checking accounts: Sensitivity to monthly fees, by age

85%

75%

65%

55%

45% Choice probability

35%

25% 0 5 10 15 20 25

Monthly fee ($)

Aggregate Age 18 to 34 Age 35 to 50 Age 51 to 64 Age 65 or older

Source: Deloitte Center for Financial Services. Graphic: Deloitte University Press | DUPress.com

8 The case for value-based pricing

Figure 6. Checking accounts: Sensitivity to interest rates, by age 75%

70%

65%

60%

55%

50% Choice probability 45%

40%

35% 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50

Interest earned APY (%)

Aggregate Age 18 to 34 Age 35 to 50 Age 51 to 64 Age 65 or older

Source: Deloitte Center for Financial Services. Graphic: Deloitte University Press | DUPress.com

1. Increase value perception on premium 3. Reduce or hold down rates, but also accounts. Because of waivers, most customers lower fees. Our study found that in the don’t actually pay any monthly fees on checking current interest rate climate, checking account accounts. So why not increase the fees (sticker consumers across the board tend to place little price) but make it easy to obtain fee waivers importance on interest income. So banks may for premium accounts? With this approach, consider holding rates low even as the federal banks will likely see an increase in customers’ funds rate gradually rises, but focus any pricing perceived value without any real change in inducements on fees. revenues. We acknowledge this strategy is 4. Do a better job communicating value. possibly controversial, but using price to signal Inform customers of the various services offered quality is common in many industries.19 and the associated costs to help reduce price 2. Consider reframing “monthly service sensitivity and amplify non-price attributes. Our fees” as maintenance charges, or even 2013 study of checking account pricing found penalties, for failing to meet minimum that more than one-third of customers had no requirements. The message to consumers: idea about what it cost to service their accounts.20 The account is free, but a maintenance charge Educating consumers more could also influence is applied if minimum requirements aren’t met. perceptions of fairness and transparency. Following this strategy could increase product attractiveness (due to the free offering) and provide stronger deterrence for inactive accounts.

9 Pricing innovation in retail banking

Credit card resurgence

Despite a more stringent regulatory climate, the only 7 percent! This finding raises questions about credit card business in the United States remains how banks communicate, and consumers perceive, strong. Predictions about the negative effects of the credit card fee waivers. CARD Act did not come true.21 In fact, the business Consumers’ survey responses were consistent with is the most profitable among commercial banking the elevated sensitivity to annual fees. Nearly 7 in activities.22 The average rate on accounts that pay 10 respondents rated “low or no annual fee” as a interest is 13.5 percent,23 with overall default rates “must have” (figure 9). A majority of respondents hovering just above 2 percent (though inching across all segments insisted on low or no fees, but up recently).24 Borrower confidence has pushed some statistically significant differences emerged outstanding balances to almost $1 trillion,25 and, between groups. among households that carry credit card debt, the average balance is $16,000.26 Here, older consumers and women had stronger preferences, again indicating their higher The credit card industry is quite concentrated; more sensitivity to prices. So did consumers who bank than 85 percent of purchase volume is concentrated with midsized regional banks and community among the top 10 issuers.27 Still, consumers have a banks, who tend to be older than the overall sample bewildering range of options, from local community (another notable finding). Respondents with the banks to large financial institutions to affinity highest credit scores also had a stronger aversion to groups. And digital payment options and mobile annual fees. Millennials were more tolerant of fees, wallets are further transforming the space.

As we mentioned earlier, the credit card business Figure 7. Test credit card is perhaps the most advanced at using data and analytics to market to consumers, but there is still Choice probability: 60.6% room to improve consumer value. Issued by a large national bank $50 annual fee, waived if annual Fees matter most, but spending exceeds 20x the fee Double the consumer’s current waivers barely do! credit limit Zero percent introductory rate for Our test credit card elicited a choice probability of 18 months, with a 3 percent balance transfer fee 61 percent (figure 7). Annual fees were the most 12 percent interest rate for high credit score important driver of choice among credit cards, respondents (20 percent for average or low credit outstripping every other attribute (figure 8)—though score respondents) not to the same degree as with checking accounts. Double cash back/points in the first year Raising the fee on our test card from $50 to $100 Cash back on all purchases with the card, and decreased the choice probability by 22 percent; bonus cashback offers at different times of the and making the card available for free yielded a year 25 percent increase. Curiously, the influence of Cash withdrawal option at 25 percent interest waivers to annual fees was small—eliminating the rate waiver and ensuring that consumers had to pay a Stronger fraud protection, with enhanced $50 fee each year reduced choice probability by detection and notification of suspicious activity

Graphic: Deloitte University Press | DUPress.com

10 The case for value-based pricing

Figure 8. Credit cards: The most important attributes that inﬂuence consumer choice

Change in choice probability due to variations in attribute levels

Annual fee 47%

Interest rate 28%

Primary rewards 17%

Introductory oﬀer 11%

Annual fee waivers 7%

Type of lender 6%

Secondary rewards 5%

Cash withdrawal option 5%

Cash withdrawal 5% interest rate

Introductory interest rate 4%

Credit limit 4%

Balance transfer fee 3%

Protection services 2%

Source: Deloitte Center for Financial Services. Graphic: Deloitte University Press | DUPress.com probably because of their attitude toward credit: Clear generational differences were apparent in Nearly 60 percent of 18- to 34-year-olds said they credit card choice: Older customers surveyed were comfortable using credit to pay for things they focused on annual fees, while younger customers couldn’t afford with their monthly income. prioritized lower rates, probably due to their greater need for, and higher comfort with, credit. Among those aged 65 and over, 40 percent didn’t see any Higher rates matter more need for low interest rates, compared to a mere than lower rates! 8 percent among Millennials. Since lower credit scores are typically skewed toward the young, it Interestingly, consumers were more sensitive to is no surprise that those with lower credit scores increases than they were to decreases in credit prioritized low rates in choosing credit cards. card rates. Raising the rate on our test card from 12 percent to 20 percent yielded a 22 percent drop in choice probability. Yet lowering it to 8 percent, Give me cash (back)! well below the current national average of 12.3 Rewards are nearly ubiquitous in credit card percent,28 increased the choice likelihood by only marketing. Of all the non-price attributes we tested, 6 percent. This asymmetric response suggests a they had the most influence on credit card choice. strong internal reference price (a “fair rate” in the Eliminating rewards from the test card led to a 17 consumer’s mind), with rates above that threshold percent decline in choice probability. This large viewed as unacceptable.

11 Pricing innovation in retail banking

drop underscores why cards that offer minimal or drop in choice likelihood, indicating that some no rewards are generally offered free. consumers view their credit card as an emergency liquidity source. Among the types of rewards, cash-back rewards were more effective than points-based incentives, Similar to checking accounts, respondents preferred perhaps because they are easier to understand, and credit cards from large national banks. However, give consumers greater spending flexibility. Our consumers did not differentiate between regional survey confirmed the popularity of cash back—it was banks, community banks, and online-only banks in far more desired than “points for air miles” (figure 9). their choice of a credit card. Credit limits also had a This preference suggests that consumers recognized muted impact on choice,30 probably because most the potentially superior value proposition of cash- card holders already had limits that met their needs. back cards.29 Millennials and consumers with the highest credit scores specifically expressed a more pronounced preference for cash-back rewards. Sensitivity analysis

Introductory offers were also important, although Our sensitivity analysis focused on annual fees the type of offer appeared to have less of an impact (figure 10). As with checking accounts, we note the on choice. Excluding an introductory offer from effect of going from “free-to-fee”—increasing the the product configuration reduced the choice price from $0 to $1 caused a steep drop in choice probability by 11 percent. Similarly, the lack of probability. The size of this effect and consumers’ a cash withdrawal option resulted in a 5 percent sensitivity to marginal fee increases rose with age.

Figure 9. How important is each of the features below when choosing a credit card?

Low or no annual fee 69% 27% 3% 1%

Fraud protection services 48% 47% 5%

Widely recognized 46% 44% 8% 1% card issuer

Low interest rate 45% 32% 22% 1%

Cash-back rewards 41% 51% 7% 1%

Introductory bonus oﬀers 27% 61% 12% 1%

Points for air miles 20% 42% 37% 1%

Discounts on purchases 19% 59% 19% 2%

Discounted introductory 19% 47% 33% 2% interest rate

Small minimum monthly 18% 34% 45% 3% payments

Existing relationship with 17% 45% 37% 1% the bank Must have Nice to have Not needed Don’t know

Source: Deloitte Center for Financial Services. Graphic: Deloitte University Press | DUPress.com

12 The case for value-based pricing

Figure 10. Credit cards: Sensitivity to annual fees, by age

85%

75%

65%

55%

45% Choice probability

35%

25% 0 10 20 30 40 50 60 70 80 90 100

Monthly fee ($)

Aggregate Age 18 to 34 Age 35 to 50 Age 51 to 64 Age 65 or older

Source: Deloitte Center for Financial Services. Graphic: Deloitte University Press | DUPress.com

However, in an important contrast to checking 1. Consider eliminating annual fees at low account fees, choice probability declined in larger dollar values. As predicted by behavioral increments with each marginal fee increase. economics, our study sample clearly showed the zero-price effect, with demand dropping steeply Simulations by gender revealed that women were as fees increased from $0 to $1. For cards with generally more sensitive to increases than were men. low annual fees, such as up to $25, banks may And consumers with high credit scores exhibited consider eliminating fees, to help meaningfully more sensitivity, which could be attributed to their increase the card’s appeal. Here, lost fee revenue financial savviness. could possibly be recovered through resulting market share gains.

What should credit 2. Raise consumer focus on fee waivers. card issuers do? In our simulations, consumers placed little value on fee waivers. Issuers should consider Credit cards are perhaps the least commoditized either eliminating or reframing them. One retail banking product in the market today; they strategy, though untested, would be to reframe are offered in multiple variations and cater toa waivers as rebates, with consumers receiving vast array of target segments. The goals of issuers, something back in return for meeting a certain processors, and affinity partners are also highly spending threshold. divergent. For instance, banks structure offerings to maximize fees and net interest income, but 3. Increase the value associated with pre- cards issued by or co-branded with affinity groups mium credit cards by raising the fee, yet make generally focus on promoting loyalty. Our guidance it easy to meet any waiver requirements. This reflects this product heterogeneity: would likely result in a higher value perception without affecting revenues. As with checking

13 Pricing innovation in retail banking

accounts, we acknowledge that this strategy is 5. Create incentives that target online and possibly controversial, but using price to signal mobile wallet spends. As transactions quality is common in many industries.31 migrate to digital channels, a consumer’s spending might consolidate to one or two 4. Reframe points-based rewards in dollar “default” or “preferred” cards. Banks should values. Our study showed that cash back was design rewards or fee waivers that would preferred over any other reward type. For cards encourage credit card holders to choose their that offer points (or miles), communicating card as a preferred option on digital wallets. the value in dollar terms can help match the perceived simplicity and transparency of cash-back rewards.

14 The case for value-based pricing

A new mortgage paradigm

The mortgage industry in the United States has Figure 11. Test mortgage undergone radical shifts in the past decade. While securitization and product innovations expanded the market significantly ahead of the crisis, regulations affected all aspects of the business Choice probability: 59.9% thereafter. Large national bank with branches across the US As of 1Q 2016, residential mortgages in the US 30-year loan term exceeded $11.1 trillion.32 However, commercial Fixed rate for the length of the loan banks’ wariness to commit capital and the costs 3.5 percent interest rate (APR) of regulatory compliance have led to their share 1 point origination fee of originations dropping from 74 percent in 2007 20 percent down payment on cost of the home to 52 percent in 2014, and likely lower in 2015.33 Nevertheless, mortgages remain a fundamental and Special oﬀer: Fixed rate reduced by 0.25 percent for depositing amount equal to 5 percent of long-term credit requirement for most Americans, mortgage in savings account at issuing bank and continue to hold appeal for many banks. Graphic: Deloitte University Press | DUPress.com Meanwhile, borrowers are in the most advantageous position in over a decade. Rates have never been interest in variable rates is understandable as rates lower, and mortgage availability is close to post- are only likely to go up in the future. crisis highs.34 Product options are also expanding— Consumers unequivocally preferred fixed rates. for instance, government-sponsored entities now Nearly 7 in 10 respondents said a fixed interest purchase qualified mortgages with 3 percent down rate is a “must have” when choosing a mortgage. payments.35 The link between macroeconomic The preference was more pronounced with age— conditions and housing investment and financing 56 percent of 18- to 34-year-olds said a fixed rate suggests that consumer choice dynamics in through the whole term was a “must have,” vs. 80 mortgages may be more fluid than in either checking percent for respondents aged 65 and over—and accounts or credit cards. reflected younger borrowers’ capacity to tolerate financial uncertainty. Respondents with the Consumers prize highest credit scores also demonstrated a stronger fixed payments, even preference for a fixed rate. over interest rates Rates are the fundamental Our test mortgage (figure 11) reflected popular driver of choice in mortgages offerings available in the market, and had a choice probability of 60 percent. Our simulations showed Raising the interest rate on our test mortgage to 5.5 that a fixed-rate structure was the most important percent from 3.5 percent reduced choice probability driver of choice, even eclipsing interest rates (figure by 17 percent. Conversely, if the rate dropped to 12). Aversion to variable rates was high—choice 2.5 percent, choice likelihood rose by 10 percent. probability dropped by 31 percent when the rate Interest rates might have even greater influence became variable after 10 years, and by 36 percent than our model results suggest. Respondents may if the fixed-rate period was 5 years long. The lack of

15 Pricing innovation in retail banking

Figure 12. Mortgages: The most important attributes that inﬂuence consumer choice

Change in choice probability due to variations in attribute levels

Rate structure 36%

Interest rate 26%

Loan term 26%

Origination fee 15%

Type of lender 14%

Down payment 13%

Special oﬀer 7%

Closing costs 6%

Variable rate reset periods 6%

Source: Deloitte Center for Financial Services. Graphic: Deloitte University Press | DUPress.com

not have fully appreciated the impact of shifting reflect not only more debt-averse behavior following rates on monthly payment amounts—the payment the financial crisis, but also the unprecedented low on a $500,000, 30-year-fixed mortgage at a 5.5 interest-rate environment. Lenders are currently percent interest rate is 26 percent higher than that offering 15-year fixed rate mortgages at APRs on a similar loan with a 3.5 percent rate. averaging 2.7 percent, a discount of about 70 basis points compared to present rates on 30-year loans.37 In our survey, nearly 80 percent of respondents However, we suspect if lenders were to focus on insisted on a “low interest rate.” As with most price and communicate monthly payment amounts attributes in our study, older respondents and more, which change drastically with loan terms, women preferred lower interest rates more than preference for longer terms would rise. their counterparts. And once again, consumers with the highest credit scores showed greater insistence The preference for shorter terms was reflected on low interest rates. in consumers’ insistence on “no prepayment penalties”—two-thirds of respondents rated them a “must have.” Recent regulatory changes apply a time Loan term preferences may restriction of three years to prepayment penalties,38 not be what you think! but consumers continue to want to pay off mortgages ahead of schedule. The long-understood The 30-year mortgage has long been the bread-and- prepayment risks associated with mortgage-backed butter of the US mortgage industry. Yet here’s one securities only support this phenomenon.39 of the most counterintuitive observations from our analysis: Consumers actually preferred shorter- In a highly competitive, low-interest rate mortgage term loans.36 market, even small differences in origination fees created meaningful impact in mortgage preference. When the loan term was changed to 15 years, choice Dropping the 1-point origination fee on our test probability for our test mortgage increased by a mortgage to zero increased choice probability by 8 substantial 16 percent; lengthening the term to 40 percent; raising the fee to 2 points decreased choice years caused a 10 percent drop in choice likelihood. likelihood by 7 percent. These preferences toward shorter-term loans may

16 The case for value-based pricing

Bank size and brands matter mortgage using email or over the phone may want the option to resolve any problems in person. little Among the other mortgage attributes, consumers The size of the lending institution had little influence did not view existing relationships with the bank on consumers’ mortgage choice: Choice probability to be material to their choice. This is probably declined by 2 percent if the test mortgage was due to the fact that financial considerations are offered by a community bank and 4 percent if predominant. And predictably, no minimum down offered by a midsized regional bank. Variations in payments were desired by younger consumers and other product attributes easily overshadowed these those with lower credit scores. differences. Brands were also not important—only 24 percent of respondents rated a “lender with a recognizable brand” as a “must have.” Sensitivity analysis

However, consumers were skittish about mortgages Our sensitivity analysis focused on loan terms. with online-only lenders—choice likelihood Increasing the term from 15 years to 40 years declined 14 percent if the test mortgage was offered produced significant shifts in the choice probability by a nonbank/online lender. We suspect consumers of the test mortgage (figure 14). prefer in-person interactions with mortgage bankers due to the complex nature of mortgage transactions. Declines in choice probability were steeper between Even consumers who would obtain or refinance a 15-year and 20-year terms, and declined less sharply between 20-year and 30-year terms.

Figure 13. How important is each of the features below when choosing your mortgage?

Low interest rate 78% 20% 2%

Fixed rate for 68% 29% 2% 1% entire loan No prepayment 66% 29% 3% 2% penalties

Low origination fee 44% 49% 3%4%

No origination fee 37% 55% 4% 3%

Reasonable late 28% 47% 24% 1% payment penalties Lender with a 24% 53% 22% recognizable brand 1% No minumum 22% 50% 26% down payment 2%

Cash back to pay 19% 59% 19% 2% for closing costs Existing relationship 18% 46% 36% 1% with lender Bank with which I already have other 15% 44% 40% 1% products Must have Nice to have Not needed Don’t know

Source: Deloitte Center for Financial Services. Graphic: Deloitte University Press | DUPress.com

17 Pricing innovation in retail banking

There was a pronounced drop in consumer our survey, fewer than two in ten respondents acceptance of mortgages with terms beyond 30 insisted on an existing relationship with their years. This again signifies how attuned American mortgage lender. So banks should emphasize mortgage borrowers are to the notion of a 30- competitiveness of the offering over current year loan being the standard. This effect was least relationships in any marketing efforts. pronounced with Millennials, who obviously have 2. Reduce sensitivity to origination fees more time to take on longer loans. Sensitivity to by bundling other services. Even with longer loan terms rose with age, except among those fast conditional approvals, taking a mortgage aged 65 and over, most of whom would already have through to closing is a challenging experience. paid off their mortgages. Lenders should consider bundling services such as home appraisals, title exams, and property What should mortgage surveys with the origination fee to help increase lenders do? customer convenience and potentially reduce customer sensitivity to the up-front fee. Our analysis reaffirms the macro-driven nature of 3. Make cross-selling central to mortgage the mortgage business. Consumer preferences shift pricing. Compared to specialty mortgage drastically in response to economic and financial lenders, banks generally hold one crucial conditions. Heavy regulation has likely contributed advantage—a large portfolio of products through to a highly commoditized marketplace, one that which they can enhance customer profitability. demands scale and extreme price competitiveness. They can trade off the weak returns on mortgages Our strategies below are framed in the context of against savings of customer acquisition costs for this reality: other products, such as credit cards or low-cost 1. Market share increases can only come deposit accounts. The latter will likely become from price-competitive offerings. In particularly valuable once interest rates rise.

Figure 14. Mortgages: Sensitivity to loan terms, by age 90%

80%

70%

60% Choice probability

50%

40% 15 20 25 30 35 40

Loan term (years)

Aggregate Age 18 to 34 Age 35 to 50 Age 51 to 64 Age 65 or older

Source: Deloitte Center for Financial Services. Graphic: Deloitte University Press | DUPress.com

18 The case for value-based pricing

The need for customer value- based pricing innovation in retail banking

UR research clearly shows that prices are dominant drivers of consumer choice in Oretail banking, and that demand sensitivity varies considerably across attributes and segments.

Our fundamental message for banks is that they need to pay more attention to pricing innovation, and that they should seriously consider refining their pricing strategies to more fully and accurately reflect customers’ value perceptions. We recognize that such a transition is not easy.

In his 2008 paper, “Customer value-based pricing strategies: Why companies resist,” Andreas Hin- terhuber identified the main obstacles executives from several countries faced when implementing value-based pricing strategies.40 The top three were: identifying the value that products create for con- right analytical talent, experts who more accurately sumers, communicating this value effectively, and understand drivers of consumer choice. Second, segmenting the market based on consumers’ needs banks should build access to high-quality customer and preferences. data along with the right analytical tools to generate insight-driven pricing strategies. This may require In our view, all three remain challenges for retail additional resources, as many banks today lack the banks in the United States. Not all banking execu- ability to even accurately assess the cost to serve in- tives have a strong understanding of the drivers of dividual retail customers. And third, banks would value for their products. This, in turn, often results need strong leadership commitment to effectively in ineffective communication of value to custom- implement innovative pricing strategies—easier ers, and suboptimal profitability. Also, effective said than done in highly competitive and commod- segmentation can be difficult to achieve, due to data itized marketplaces. limitations, current regulations, and product homo- geneity. Pricing innovation as a discipline may seem formi- dable, but the potential benefits for retail banks— For banks that aspire to leadership in pricing inno- happier customers, stronger financial performance, vation, there are three fundamental prerequisites and a more robust banking system—can be substan- to revamping the design and execution of pricing tial and enduring. Now that’s valuable! strategies. First, it is crucial for banks to have the

19 Pricing innovation in retail banking

Appendix A: Methodology

For this study, the Deloitte Center for Financial Scenario design was nearly orthogonal, enabling Services worked with Advanis, a Canadian market the estimation of the impact on customers’ and social research firm, to conduct a survey of 3,001 preferences of every product feature independently respondents based in the United States. Minimum from the others. Each participant saw one block of quotas by age and financial parameters (income scenarios per product (that is, four choice cards), or net worth) were established at an overall survey and two products in total, based on current product level. Final distributions of participants within the ownership. stated quotas are displayed in the table below. Each respondent was assigned to two of the three Conjoint analysis retail banking products covered in this study, with methodology at least 1,400 respondents for each product. These requirements were stated to ensure that the survey Nested logistic regression (logit) models were sample captured a population of bank consumers initially estimated to determine the impact of each who had access to both savings and credit products, attribute on a product offer’s choice probability. across generations and financial profiles. Given that in each model, the value of the inclusive parameter wasn’t significantly different from 1, Choice task design multinomial logit models were used instead. Each model included the main effect for each design A discrete choice modeling approach using stated variable, covariates interacting the design variables preference data was utilized in order to understand with individual-specific data on current usage, the trade-offs individuals make when selecting a preferences or thresholds, and interactions of the financial product. design variables with segment membership.

Main-effects experimental designs were first The models were used to develop simulators for each created to construct three sets of scenarios—a set product that predict customers’ choice probability, for each product. A total of 128 scenarios, grouped either individually, or in a market simulation of up in 32 blocks of four scenarios, were created for each to four products. The results from this simulator product. The specific product attributes and levels analysis have been extensively discussed in this used to generate these scenarios are included for paper. reference in appendix B.

Income (not retired) Net worth (retired)

Responses (% of total) Total <$75k $75k—$150k >$150k $100k—$250k $250k—$500k >$500k <35 25% 9% 9% 7% 0% 0% 0%

35—50 25% 9% 9% 8% 0% 0% 0% Age 51—64 29% 8% 8% 9% 1% 1% 1% >=65 21% 3% 2% 2% 4% 4% 6%

Total 100% 28% 28% 26% 5% 6% 7%

20 The case for value-based pricing

Appendix B: Product attributes and levels

Below are the specific set of product attributes and levels that were randomized to design the choice task analysis described above.

Checking accounts Attribute Levels Large national bank with branches across the US Regional bank with branches only in your region Type of bank Community bank with branches only in your town or county Online or mobile bank with no branches Cash bonus ($50/$100/$150)

New account Gift card ($50/$100/$150) offer Earn 1.5% interest in first six months No new account offer If you make two direct deposits of at least $300 in first 90 days

New account If you make $500 minimum initial deposit offer condition If you make five debit card purchases and recurring direct deposits of $500 in first 90 days If you make automated bill payments totaling a minimum $250 per month Monthly fee None/$10/$15/$25 You have minimum $1,000 monthly direct deposits

Monthly fee Your monthly balance averages $1,500 waived if You have loan, credit card, or mortgage with the bank You have $20,000 in other bank products or a wealth management account with the bank Interest No interest/0.1%/0.2%/0.5% earned (APY) Branch within 5 minutes of home or workplace

Branch Branch within 15 minutes of home or workplace location Branch more than 30 minutes from home or workplace Online-only bank with no branches 0.25% rate discount for new auto, home equity, or personal loans Earn 10 cents cash back on the first 100 transactions per month Special offers Double the points on your bank credit card for one year None No fees within large ATM network

ATM network No fees within small ATM network and fees No fees at any ATMs in the US No fee within small ATM network, and four no-fee transactions a month outside of network Insufficient funds transferred from savings; $10 fee for each $50 transferred Overdraft Account allowed to turn negative, but $35 fee each time, up to $100 a day; bank can also deny coverage protection None. Account balance cannot turn negative, but $35 penalty fee for returned checks

21 Pricing innovation in retail banking

Credit cards Attribute Levels Small community bank Midsize regional bank Type of bank Large national bank Online-only bank Same as your current credit limit 25% more than your current credit limit Credit limit 50% more than your current credit limit 100% more than your current credit limit 0% for 18 months

Introductory 0% for 12 months interest rate 0% for 6 months No introductory rate 15%/8% Ongoing interest rate 20%/12% Low FICO/ 25%/16% High FICO 30%/20% $200 cash or gift card if you spend $3,000 during first three months

Introductory $200 in airline miles when you spend $3,000 during first three months offer Double cash back or points for first year None Points redeemable for gift cards and online retail products

Primary Points redeemable for hotels, airlines, and car rentals rewards Cash back on all purchases made with the card None Cash back when you make purchases at certain stores or restaurants

Secondary Airline perks, such as priority boarding and airport lounge access rewards Bonus cash back—offers at different times of the year for different types of purchases None Trip insurance (e.g., trip interruption, cancellation, missing baggage, and rental car insurance) Additional fraud protection (e.g., more detection, quick notification of suspicious activity, speedy Protection reimbursement) services Additional purchase protection (e.g., reimbursement for broken and undelivered products bought with card) None Annual fee None/$50/$75/$100 For the first year

Annual fee If you spend 20 times the annual fee in the year using this credit card waiver None Not applicable None Balance 3% of balance transferred transfer fee No balance transfer ability Cash withdrawal 15%/25%/30%/No cash withdrawal option interest rate

22 The case for value-based pricing

Mortgages Attribute Levels Large national bank Midsize regional bank Type of lender Local community bank/Credit union Nonbank/online lender 15 years 20 years Loan term 30 years 40 years 5% 15% Down payment 20% 30% 5.0%/2.5% Interest rate 6.0%/3.5% Low FICO/ High FICO 7.0%/4.5% 8.0%/5.5% Through the entire loan term For the first 10 years Fixed rate term For the first 7 years For the first 5 years Interest rates change every six months according to the market Rate changes Interest rates change once a year according to the market after fixed term Interest rates change every two years according to the market Not applicable None 0.5 point Origination fee 1 point 1.5 points 2 points You receive cash from bank to pay part or all of closing costs Closing costs You receive cash to pay for closing costs, but this amount is added to the loan You pay all closing costs Fixed rate offer reduced by 0.25%, if you make a deposit equal to 5% of mortgage into a savings account with the bank Mortgage linked to interest-earning account with earnings deducted from mortgage interest payments Special offer Overpayments on mortgage payments applied toward skipping future payments, if needed Mortgage part of "all-in-one" savings, credit card, and checking account with savings interest earned offsetting mortgage interest payments None

23 Pricing innovation in retail banking

ENDNOTES

1. Berkshire Hathaway Inc., 2008 chairman’s letter to Berkshire shareholders, February 27, 2009, http://www. berkshirehathaway.com/letters/2008ltr.pdf

2. The Credit Card Accountability Responsibility and Disclosure Act of 2009.

3. Thomas T. Nagle, John E. Hogan, and Joseph Zale, The Strategy and Tactics of Pricing, Fifth Edition (New York: Routledge, 2016).

4. Philips Publishing Inc., “Creditors struggle to redefine pricing under fire,” Credit Risk Management Report 2, May 11, 1992.

5. Susan Burhouse et al., 2013 FDIC National Survey of Unbanked and Underbanked Households, FDIC, October 2014, https://www.fdic.gov/householdsurvey/2013report.pdf.

6. FDIC statistics on depository institutions.

7. Ibid.

8. Gary Stein, “New insights on bank overdraft fees and 4 ways to avoid them,” Consumer Finan- cial Protection Bureau, February 25, 2016, http://www.consumerfinance.gov/about-us/blog/ new-insights-on-bank-overdraft-fees-and-4-ways-to-avoid-them/.

9. Val Srinivas, Ryan Zagone, and Dennis Dillon, Retail bank pricing: Resetting customer expectations, Deloitte Center for Financial Services, February 12, 2013, https://www2.deloitte.com/content/dam/Deloitte/global/Documents/ Financial-Services/dttl-fsi-us-consulting-Retail-Bank-PricingPOV-02122013.pdf.

10. Claes Bell, “Another record-setting year for checking account fees,” Bankrate.com, 2015, http://www.bankrate. com/finance/checking/record-setting-year-for-checking-account-fees-1.aspx.

11. Consumers were asked to self-report their credit scores in the survey.

12. American Bankers Association, “Survey: Most Americans pay nothing for bank services,” August 18, 2015, http:// www.aba.com/Press/Pages/081815SurveyonBankCosts.aspx.

13. NerdWallet, “The history of bank accounts,” June 16, 2014, https://www.nerdwallet.com/blog/banking/ history-of-bank-accounts/.

14. J.D. Power, “Big banks show significant gains in customer satisfaction as midsize banks decline and regionals plateau, J.D. Power U.S. retail banking study finds,” press release, April 28, 2016,” http://www.jdpower.com/ press-releases/2016-us-retail-banking-satisfaction-study.

15. S&P Global Market Intelligence; SNL Financial Deposit Market Share Summary. Market share is for US territo- ries only and non-retail branches are not included.

16. US Federal Reserve, “Checking box B,” 2013 Survey of Consumer Finances.

17. Anne Gammon, “Bank branch location still key for consumers,” YouGov, October 6, 2014, https://today.yougov. com/news/2014/10/06/bank-branch-location-still-key-consumers/.

18. Kristina Shampanier, Nina Mazar, and Dan Ariely, “Zero as a special price: The true value of free products, http://pubsonline.informs.org/doi/abs/10.1287/mksc.1060.0254

19. Asher Wolinksy, “Prices as signals of product quality,” Review of Economic Studies 50, October 1983; Stanford University, “Price tag can change the way people experience wine, study shows,” Science Daily, January 31, 2008, https://www.sciencedaily.com/releases/2008/01/080126101053.htm.

20. Srinivas, Zagone, and Dillon, “Retail bank pricing: Resetting customer expectations.”

21. Oren Bar-Gill and Ryan Bubb, “Credit card pricing: The CARD Act and beyond,” Cornell Law Review 97 (2012).

24 The case for value-based pricing

22. “Report to the Congress on the profitability of credit card operations of depository institutions,” board of governors of the Federal Reserve System, June 2016.

23. As of 1Q 2016, consumer credit G.19, US Federal Reserve, August 5, 2016.

24. As of 1Q 2016, charge-off and delinquency rates on loans and leases at commercial banks, US Federal Reserve.

25. Annamaria Andriotis and Robin Sidel, “Balance due: Credit-card debt nears $1 trillion as banks push plastic,” Wall Street Journal, May 20, 2016, http://www.wsj.com/articles/ balance-due-credit-card-debt-nears-1-trillion-as-banks-push-plastic-1463736600.

26. Robert Harrow, “Average credit card debt in America: 2016 facts & figures,” ValuePenguin, May 2016, http:// www.valuepenguin.com/average-credit-card-debt.

27. The Nilson Report, issue 1081, February 2016.

28. As of 1Q2016, consumer credit G.19, US Federal Reserve, August 5, 2016.

29. Erin El Issa, “Cash-back credit cards better than travel cards for most Americans, survey analysis finds,”NerdWallet , June 21, 2016, https://www.nerdwallet.com/blog/credit-cards/ cash-back-vs-travel-rewards-credit-cards-study/.

30. The impact of certain attributes such as credit limits, balance transfer options, or introductory interest rates may be understated in our study, reflecting the skew toward higher credit scores in our sample. Since about two-thirds of our respondents had not rolled over credit card balances in the past year, some of these debt- related variables may not matter as much to them.

31. Wolinksy, “Prices as signals of product quality”; Science Daily, “Price tag can change the way people experience wine, study shows.”

32. Mortgage debt outstanding, US Federal Reserve, June 2016.

33. Andrea Riquier, “Big banks are fleeing the mortgage market,” MarketWatch, February 12, 2016, http://www. marketwatch.com/story/big-banks-are-fleeing-the-mortgage-market-2016-02-12.

34. Mortgage Bankers Association, “Mortgage Credit Availability Index,” August 4, 2016, https:// www.mba.org/news-research-and-resources/research-and-economics/single-family-research/ mortgage-credit-availability-index.

35. Garrick T. Davis, “Setting the record straight on 97 percent LTV mortgages — they work,” The Huffington Post, January 29, 2015, http://www.huffingtonpost.com/garrick-t-davis/setting-the-record-straig_20_b_6558428.html.

36. While this relationship is highly significant in our discrete choice model, we note a probable reason for respondents’ preference for shorter loan terms—all of them already have a mortgage (a screening criteria for the survey). The survey asked them to choose among offerings as though they were getting a new mortgage, but since most would not, in reality, take a new mortgage, this could help explain why shorter loan terms were more “top of mind” for them.

37. Freddie Mac, “Mortgage rates fall back near 2016 lows,” Primary Mortgage Market Sur- vey press release, August 4, 2016, http://freddiemac.mwnewsroom.com/press-releases/ mortgage-rates-back-near-2016-lows-otcqb-fmcc-1257676.

38. Amy Loftsgordon, “When are prepayment penalties allowed in new mortgages?” NOLO, retrieved on August 9, 2016, http://www.nolo.com/legal-encyclopedia/when-are-prepayment-penalties-allowed-new-mortgages.html.

39. Sean Becketti, “The prepayment risk of mortgage backed securities,” Economic Review, The Federal Reserve Bank of Kansas City, February 1989.

40. Andreas Hinterhuber, “Customer value-based pricing strategies: Why companies resist,” Journal of Business Strategy 29, no. 4 (2008), http://lp-website.s3.amazonaws.com/pdfs/Customer_value_based_pricing_strategies. pdf.

25 Pricing innovation in retail banking

ABOUT THE AUTHORS

VAL SRINIVAS

Val Srinivas is the banking and securities research leader at the Deloitte Center for Financial Services, Deloitte Services LP, where he is responsible for driving the Center’s banking and securities research platforms and delivering world-class research to clients. Srinivas has more than 15 years of experience in research and marketing strategy in credit, asset management, wealth management, risk technolo- gy, and financial information markets. Before joining Deloitte, he was the head of marketing strategy in the institutional advisory group at Morgan Stanley Investment Management. Prior to this, Srinivas spent more than nine years leading the global market research and competitive intelligence function at Standard & Poor’s. He has written several articles for Deloitte University Press, and most recently co- authored Disaggregating fintech: The brighter shades of disruption.

URVAL GORADIA

Urval Goradia is a senior market insights analyst at the Deloitte Center for Financial Services, Deloitte Services LP. Goradia researches and writes on a broad range of themes in banking and capital markets, including strategy, risk, and regulation, with specific focus on performance imperatives. Before joining Deloitte, he was a financial institutions credit analyst at the Fitch Group. Goradia is a CFA charterholder. His last piece for Deloitte University Press was The future of wealth in the United States.

STEPHEN FROMHART

Stephen Fromhart is a manager at the Deloitte Center for Financial Services, Deloitte Services LP, covering the banking and capital markets sectors. Before joining Deloitte, Fromhart spent 15 years at Ameri- can International Group where he directed a research and strategy group, covering multiple industries. In addition, he led the sovereign risk analysis unit for the company’s credit risk rating committee. He has also been a contributor to white papers for the World Economic Forum. Fromhart earned his master’s degree from the School of International and Public Affairs at Columbia University.

26 The case for value-based pricing

ACKNOWLEDGEMENTS

The authors and the Center would like to specially acknowledge Matt Gantz, advisory senior consultant, Deloitte & Touche LLP, for excellent research support.

The authors and the Center also thank the following Deloitte professionals for their support and contri- butions:

Michelle Chodosh, marketing manager, Deloitte Center for Financial Services, Deloitte Services LP

Patricia Danielecki, senior manager, chief of staff, Deloitte Center for Financial Services, Deloitte Ser- vices LP

Karen Edelman, manager, US Eminence, Deloitte Services LP

Megan Riley, senior marketing specialist, Deloitte Services LP

27 Pricing innovation in retail banking

CONTACTS

Industry leadership Contact Kenny M. Smith Georg Muller Vice chairman Managing director, Monitor Deloitte US Financial Services Industry leader Deloitte Consulting LLP Deloitte LLP +1 312 604 3538 +1 415 783 6148 [email protected] [email protected]

Deloitte Center for Financial Services Jim Eckenrode Executive director Deloitte Center for Financial Services Deloitte Services LP +1 617 585 4877 [email protected]

Val Srinivas, Ph.D. Banking and Securities research leader Deloitte Center for Financial Services Deloitte Services LP +1 212 436 3384 [email protected]

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